“Can SAFTA Transform South Asia Into An Economic Union?”

By:Mr. Mujeeb Ahmed Khan

Head Research Analysis DirectorateWTO Cell

Trade Development Authority of Pakistan Government of Pakistan

South Asia – Some Hard Facts

Home to half of the world’s poor.

Home to 1/4th of the world’s population.

40% living on less than US $1.25 a day.

Accounts for only 2.5% of global GDP.

Only 2% of world exports.

1.6% of world FDI.

Some Heartening Facts

Amongst the fastest growing economies in the world – averaging 6% since 1990’s.

Annual income growth has averaged 7.7% since 2002 – outpacing southeast Asia by about 2 percentage points.

1/5th population aged between 15 and 24 (the largest number of young people ever to transition into adulthood in the world).

Forms of Regional Trading Agreements

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Members remove trade barriers among themselves but keep their separate national barriers against trade with outside nations.

Free Trade Agreement

Custom Union

Members not only remove trade barriers among themselves but also adopt a common set of external barriers.

Common Market

Members allow full freedom of factor flows (migration of labor and capital) among themselves in addition to having a custom union.

Economic Union

Members unify all their economic policies, including monetary, fiscal and welfare policies, while retaining the features of a common market.

WILL SAFTA SUCCEED?

A) Economic Characteristics Should Be Similar.

B) TradeCharacteristics Should Be Similar.

C) Symmetry in Economic Activity.

A) Economic Characteristics Should Be Similar.When comparing in terms of economic structure, namely, savings as a percentage of GDP, demographic profile and labor mobility, SAFTA member countries have many similarities.

The industrial sector constitutes roughly a fourth of GDP in all countries.

Although a majority of the population still lives in rural areas, all of these countries are becoming increasingly urbanized.

These countries also share a similar demographic profile. The more similar are the economies, the more similar is their export profile.

Greater economic cooperation among SAFTA members holds important implications in the form of larger market and economies of scale in production.

These factors should act as further incentives for the smooth functioning of SAFTA.

WILL SAFTA SUCCEED?

B) Trade Characteristics Should Be Similar.Most of the SAFTA member countries have a lower trade-GDP ratio and have initiated external sector liberalization (that is, bringing down tariff barriers), starting only in the 1990s.

A large number of NTBs currently exist in the region. These NTBs include antidumping measures, procedural requirements, sanitary and phyto-sanitary standards, certification and technical standards.

With a similar export profile, trading partners are better off with fewer restrictions. Because countries in the SAFTA region share a similar export profile they also face the same types of NTBs; hence, they share a similar negotiating stance for removing these barriers.

Recent trade data suggest that intra-SAFTA trade is on the rise. Most of the Governments in SAFTA are undertaking considerable external sector liberalization (ESCAP, 2006). Therefore, there are indications that the currently low level of intra-SAFTA trade is likely to flourish in the future.

WILL SAFTA SUCCEED?

When countries share a similar industrial profile and are located closely, then the demand shocks in one country may affect other countries in the region.

Countries in South Asia in general have a similar export profile. Symmetry in economic activity also implies that there is a lesser contradiction in terms of formulating internal and external macroeconomic policies.

In fact, this aforementioned economic characteristic of South Asian countries will enable them to go beyond the FTA framework and work for deeper economic integration, such as forming a common market and economic union.

(Banik 2006 / Manoharan)

WILL SAFTA SUCCEED?C) Symmetry In Economic Activity.

Future For The South Asian Economic Union !

South Asian Economic Union, like the European Union, is hypothesized to bring peace to this volatile region.

The biggest benefit of the EFTA and EU is that it has diminished the prospect of another war between the traditional European rivals(France & Germany) to a virtual impossibility.

Similar factors were at play when ASEAN was founded in the 1960s as the smaller countries in South East Asia region vowed to cooperate amongst each other to guard against possible invasion by larger players in the region ( e.g. China, Korea, and Japan)

In the case of both EU and NAFTA, successful and sustainable economic integration arrangement has required a large country to act as an anchor for the arrangement.

Incremental approach

A Large Country to act as an

anchor for the arrangement.

Political Will

Bringing down the Barriers

What Will It Take ?

What Will It Take ?

1) Political Will;

2) Bringing Down The Barriers;

The 2002 Katmandu Declaration on Economic Integration, in addition to calling for creation of a South Asian Free Trading Area by 2006, calls for the creation of a South Asian Customs Union (SACU) by 2015, and a South Asian Economic Union (SAEU) by 2020.

a) Most Favored Nation Status. (Pakistan)

b) Reduction and harmonization of Non-Tariff Barriers

What Will It Take ?

3) Incremental Approach;

4) A Large Country to act as an anchor for the arrangement ;

a) Can India make the kind of sacrifices (made by larger EU members e.g. (Germany and France) needed to make this arrangement a reality?

b) Can India really prove themselves worthy of leading a group of skeptical countries without actually making them feel that they are being led?

c) Can India show the kind of magnanimity befitting of an emerging super-power that has no insecurities about its new-found status--and hence no need to assert it--that would be required of an anchor country to make SAFTA/SAEU a success?

a) Full implementation of SAFTA – 2012.b) Work Towards SACU.